Seed and Angel Capital Strategies for Atlanta

angel_investor2.gifI’ve gotten into this same conversation with 3 or 4 people this week, and it is one that comes up quite often during my discussions with early-stage technology CEOs here in Atlanta. How do I find seed or angel angel capital in Atlanta so that I can fund my high-tech widget or software company?

Raising money is rarely easy. It is even harder in Atlanta. The good news is that software/IT is a sector in which Atlanta is very strong. There are a lot of people in this city that get information technology.

Whenever the “panels” and “luminaries” are asked this question, they usually throw out the two stock answers: the 3F’s and Sig Mosley. The 3F’s being friends, family, and fools, and Sig Mosley being the unwitting godfather of early-stage technology investing in Atlanta.

What they fail to tell you, however, is how you should actually go about approaching these angels, and in what order.

For the purposes of this discussion, I’m using the phrase “seed” capital to generally refer to the cash it takes to get a prototype together, and “angel” capital to refer to the cash it takes to get the sales process going and begin building the business. There is obviously some crossover, and nothing is ever black and white in venture.

Your Own Backyard

If you are personally sitting on a pile of cash, the answer here is obvious. However, that isn’t a luxury for most young entrepreneurs. I do see this quite a bit, though, with older first-time entrepreneurs (i.e. the person who took the package from the corporate exit.) In any event, if you don’t have tons of cash lying around, don’t despair. Hopefully, the reason you are an entrepreneur to begin with is because you are resourceful, innovative, and can think out of the box.

Do you have equity in your home? If you hve a home equity line of credit with a checkbook, this gets even easier – no need to even go to the bank and get a home equity loan, just start writing checks off your house. If you are contemplating buying a new home, make sure you work with your lender to establish a home equity line of credit up front – I hear they can be more difficult to establish once you’ve already bought the house.

Do you have stuff you can (and are willing to) sell? Seriously. I know one guy who sold his collection of baseball cards to finance his business. That 1952 Mickey Mantle rookie card looks great up on the wall in the shadow box, but if it can put $250K+ into your business, it may start to look better on someone else’s wall.

Can you find a soul mate? If you are a young technology type, it may make sense to find your better half in an experienced CEO who can also fund your deal. There are plenty of these types of folks wandering around Atlanta right now. And many of them are looking for young bucks with bright ideas.

Can you bootstrap the business with initial sales? I see this a lot when the entrepreneur is a hands-on technical person. They pay $0 for software development, and can build the prototype on their own, and just start bootstrapping the business with those first sales.

I have some other bootstrapping tips here.

Friends, Family, & Fools

Everyone likes to think that they have lots and lots of friends. You really see who your friends are when you are trying to shake them down for cash. :) In the end, most of them will let you down. But that’s ok.

The next stop should definitely be your friends and family. Don’t get discouraged if they (a) don’t have the capital to invest in your venture, (b) refuse to do it because they don’t believe in your abilities or your idea, or (c) are simply scared of venturing forth into the unknown. This is the low-hanging fruit – if you can scrape up a few seed dollars from your friends and family, do it – and move on to the next group (the fools.)

My advice here? Don’t just show up on their door step and be completely half-assed prepared. Put together a presentation, demo, one-pager, etc. and walk them through it. Show them that you’re serious. At this stage, don’t waste time with a business plan, though. You’ll spend more time on that than you will in building the actual product or business. Just do a 1-3 page executive summary and a 10-15 slide presentation and go with it.

High-Net Worth Individuals

These people aren’t “literally” fools – they didn’t get to become high-net worth individuals by making silly decisions. Rather, they are fools in the figurative sense (“anyone investing money in Jimmy’s new venture is surely a fool.”)

How do you find these individuals? For most young entrepreneurs, it isn’t easy, as they have not yet amassed a large professional network against which to tap. In any event, the only way to really get to these individuals is through good old fashioned networking. Get out to every local professional event you can find. Throw out your pitch to anyone who will listen, and start following up. Soon, you’ll have built a pretty sizable list of contacts that you can leverage to try and raise the cash you need.

If you are here in Atlanta, there are networking events almost every night (MIT Enterprise Forum, Technology Association of Georgia, TechLINKS, etc.) But be aware that most of these events are rife with service providers, many of whom are not angel candidates (although there is the occasional exception.) For many reasons I prefer our Capital Connections event (via StartupLounge.com), which is free of service providers (by design.)

I should also point out that if you are just randomly trying to pitch to people, you are probably not going to secure funding (unless you’ve managed to cobble up the cure for cancer in your basement.) Target your search! For example, if your idea involves a software product that solves a big problem for insurance agents, go hang out with insurance agents. Find out where they have their events and go. Don’t waste your time at the big free-for-all networking events. This is perhaps one of the biggest reasons that people fail to meet angel investors, despite trying their best to network.

Oh, and don’t bother trying to find an angel at events that cater solely to entrepreneurs. They likely aren’t there.

You should also befriend the CEOs of other startup companies. Find out who their angels were, and establish a relationship with them. One angel can often lead to introductions to 5 or 10 others … always ask for a referral!

I would recommend pitching to at least 5 or 10 qualified, individual angels before moving to the next step. Ideally, you will begin to get some traction/interest from some of them.

Atlanta Technology Angels

The ATA is a membership organization comprised of high-net worth individuals. They meet once a month, and have a few companies come in and pitch to the group. That’s the good news. The bad news is that since they only allow a couple of companies to pitch each month, coupled with the fact that a good bit of their deal flow comes from the ATDC and/or Georgia Tech (simply due to proximity), your chances of getting selected to participate are probably mathematically lower.

Also, they are an “angel group” – a bunch of angels that pool their funds together – this buying power can lead lead to a skewing towards where a traditional venture firm would invest (the ATA doesn’t invest in great ideas alone, although they do look at pre-or-early revenue prototype companies.) This is a macro venture trend that has been documented by plenty of other folks.

Also of note is the fact that according to their portfolio page, they only make a few investments per year – so keep that in mind. Of course, this doesn’t mean that a single individual member couldn’t invest on his/her own.

I recently attended one of their meetings, and shared some of my thoughts here.

The Communications Group

Attorney Martin Tilson runs a group called the Communications Group. Martin used to be with Kilpatrick Stockton, but is now with Burr & Forman. The group meets monthly and they have 2-3 entrepreneurs come in to pitch. This group has been around a long time, and as a result, the members skew to the “wizened” end of the age spectrum (fancy way of saying “populated by a bunch of grey-haired guys”.) Nothing wrong with that, just keep it in mind. They will likely get more excited about traditional types of companies such as telecom, enterprise software, and hardware.

Unlike the ATA, this group doesn’t invest as a group – but rather each member is free to follow up with the entrepreneur on their own. Note: the audience will range from high-net worth individuals to traditional venture-capitalists, and everything in between. Keep that in mind – many of those investors may not necessarily be looking for a true angel-level opportunity, but rather, something later stage.

My advice? Don’t pitch this group with cleantech, online communities, Web 2.0, social networks, and plays in other emerging industries, but if you have a more conventional play, give them a look.

Sig Mosley/Imlay Investments

Sig is a nice, unassuming type of guy. I don’t know him all that well, but I’ve met him several times. I’ve pitched to him before as well. Sig has a very strong reputation here in Atlanta. He’s made some good picks over the years and as a result, many others here often use Sig as an investment “compass.”

Many angels, VCs, attorneys, and accountants here in Atlanta, when approached by an entrepreneur seeking to raise outside capital, will simply ask “have you pitched to Sig yet?” If you have indeed pitched to Sig, and he passed on your deal (or didn’t get all excited about it,) the effort required to convince those other investors to take you seriously just went way up.

My advice? Pitch Sig last – not first. Maybe I’ve just coined a new buzzword here: “Sig’d: the tainting of the pool of local investors that occurs when you prematurely pitch your deal to the biggest angel in town only to have him pass on it.” :)

I would provide a link to the Imlay Investments web site, but they don’t have one (even though they own “imlay.net”, which they use for email.) Yes – the biggest early-stage technology investor in Atlanta doesn’t even have a web site. I’ll leave you to ponder the meaning and impact of that on your own. Sig/Imlay has had a ton of successes over the years. A web site promoting those successes would go a long way towards putting a spotlight on the good deals that have gotten done here. My two cents.

Note: You may run into Sig at either the ATA or Communications Group meetings. So you may end up pitching to him without realizing it. FWiW. I would still recommend pitching to these groups as a whole first.

Capital Brokers

I define a “capital broker” as simply “a person who charges you a fee to find capital.” There are a ton of these folks out there. I am not a fan of this model, for reasons I’ve written about in the past (and ranted on in our podcast.) Entrepreneurs shouldn’t have to pay to find capital. Period. This is a sign of an unhealthy market for early-stage capital.

And how much do these brokers charge? They vary, but I know some that want a piece of your company (5-8%), a finder’s fee (5-8%), and a monthly retainer fee ($3-5K.) Nonsense.

This type of service is typically used by uninitiated entrepreneurs or those who have explored every other option and have come up empty. My advice? Use these groups as a last resort, or hopefully, never at all. If you are struggling to find capital, perhaps your idea really does stink. Or, perhaps you just need a tune-up or makeover on your presentation. Ask someone for help, but please don’t perpetuate the problem by paying through the nose for it.

Pay-to-Pitch Groups

Another model I don’t particularly care for are the models where someone charges an entrepreneur to put them in a room full of alleged angels. See above. An entrepreneur should not have to pay to pitch their deal. Period. Again, last resort, or never at all. In a healthy market, these types of entities are out of business. Sadly, in Atlanta, they’ve been able to carvee out a place for themselves.

Note: I was having a conversation recently with a non-Georgia VC who actually laughed when I told him about the proliferation of capital brokers and pay-to-pitch outfits here. He thought I was joking. Then he realized I was serious, and just shook his head in disbelief.

Traditional Venture Capital Firms

Noro-Moseley, H.I.G., Kinetic Ventures, EGL, etc. Don’t bother – they aren’t interested in making seed or angel investments, nor should they be. However, I would encourage you to make these connections and begin building those relationships for later use. You may occasionally find a venture capitalist that is an individual angel, or perhaps one that will become emotionally attached to you or your deal, and refer you to an angel. But by and large, it isn’t going to be worth your time (or theirs) to try and sell them on your seed/angel-level deal.

The “Optimum” Order

YOU!, friends, family, high-net worth individuals, ATA, Sig Mosley. Communications Group, capital brokers, pay-to-pitch. If all else fails, you could also consider debt financing. If after all of this, you still don’t have any interest, it could very well be that your idea stinks. Been known to happen. It could also be that your idea is tracking a few years ahead of the innovation curve here in the Southeast. Been known to happen as well.

Hope this helps those of you seeking to raise seed or angel capital for your new venture. If you have a question, I’m happy to try and answer it (or find someone who can answer it for you.) Or, you can post it in the forums over at StartupLounge.com. Good luck!

Cheers.

7 Comments

  1. Knox Massey · May 27, 2007 at 7:53 am

    Scott–
    Nice post, but let me elaborate on some of your comments.

    1.) We generally only have time at the monthly meeting to review two investment opportunities. However, we talk to companies on a continual basis-and have funded companies without a formal meeting.

    2.) It is always helpful to remember that ATA is comprised of Atlanta-based individuals who are investing their own private capital—not OPM (other people’s money) in, specifically, Atlanta based technology companies.

    3.) Generally, we fund companies “before” they are accepted into ATDC–not after-(Oversight, Vocalocity, Zeewise, etc).
    VentureLab is a different story. The technology developed at GATech generally needs to go through a specific “channel”. We track that “channel” and get involved when appropriate.

    4.) One of the missions of ATA is to fund and build Georgia companies to help attract outside institutional capital (since there is, unfortunately, not much in GA). We have helped attract approximately 15X the capital ATA has invested since 1999 ($250M-$300M). ATA companies have helped bring approximately 20 VC’s from 10 states to invest in GA-based companies. ATA is strongly geared towards investing in and promoting Georgia as an innovative market.

    Cheers.

  2. A subtle point of your blog that is worth amplifying is the importance developing good networking skills. Getting access to and then the trust of high net worth individuals is difficult and time-consuming. (That doesn’t mean don’t do it – but rather it requires brains, effort and sincerity). A start would be the startuplounge.com podcast #1. Some other thoughts.

    High net worth individuals are best accessed either through their trusted advisors, close professional contacts, or through their non professional activities.

    Trusted advisors included wealth managers, accountants and attorneys.

    Professional contacts would be businesses in which the particular high net worth individual has invested, or business partners.

    Non professional activities might include recreational activities (golf is the most obvious example) or charity-related events.

    When you do meet such individuals, don’t hit them up for money right away. You then become indistinguishable from a panhandler. Get to know them. See how you might help them. Seek resources that don’t require a check (advice, contacts, information). At some point the conversation will turn to how they might help you…

  3. Mike – great insights! I especially agree with your point about not coming across as a panhandler. The astute entrepreneur is going to be rewarded by their patience and ability to cultivate a relationship.

    Knox – thanks for stopping by and posting the additional info and insights on the ATA. Your #3 I think is an important data point (and one that I didn’t know.)

    I’m all about helping you guys with #4. Let’s make sure we add this to our agenda when we meet next.

    Cheers.
    Scott

  4. Paul Freet · May 29, 2007 at 9:09 am

    Great post Scott.

    One of the problems with creating a robust technology community is the need for volume. Silicon Valley doesn’t work because all the smart people are there. It works because of the vast number of startups that take a shot (most of which fail). No one can predict the winners and losers at the outset – it is folly to try. But if 100 companies led by bright aggressive entrepreneurs with sufficient funding can make it out of the starting gate, a few are likely to be huge successes. Which ones? You cannot possibly know, that’s why you have to start 100. If Imlay and ATA fund 5 companies total and ATDC lets in maybe 10 a year, the chance of any one of them being the next eBay or Paypal is small indeed. It is a numbers game. Would you ever buy a mutual fund that only invested in 5 companies? I’d like to know how many companies Knox Massey or Sig Moseley see in a year? 100? 200? And they invest in 2? I don’t fault them. But if those are the two primary sources of seed funding, that it is no where near enough if the Atlanta tech community is to every escape its backwater status.

  5. I agree, Paul. We have to plant a lot of seeds if we want to get some new trees in the forest. Doing a few deals a year is status quo, and not enough to drive change in the larger market.

    I think once some of these newer funds begin bubbling up (and they will be soon, I think), we’ll start to see some more activity.

    I know of at least two regional VCs that are looking at putting a presence in Atlanta as well – evidence, to me at least, that there is innovation happening here.

    Cheers.
    Scott

  6. Pingback: Chip Griffin: Pardon the Disruption

  7. Brac Wardlaw · January 22, 2008 at 6:21 pm

    Scott,
    This is all helpful information and I wish I would of learned about Startup Lounge long ago. We have been approached by every capital broker or just a guy that wants $25 – $100k to rewrite our business plan (fell for that one 12 years ago and won’t happen again). Just a note about the “how to”, after a pretty extensive run of working to raise capital for a non-tech venture (homebuilding) with a heavy new tech component the only two things I really learned was (1) it costs to much money to try and meet investors and pitch them (2) I didn’t know enough people. The guys who have been there done that have access to walk a deal in the door, most entrepreneurs are still trying to email their executive summary to busi...@sherpalo.com (or whatever investor site they come across). Word of advice to entrepreneurs who may read this, “don’t wait by the phone for a speedy reply.” How do you feel about sites like GoBIG Network? We have been working on something that emulates how you guys help. This is how I found out about you. One of the people who we are working with told me about Startup Lounge. We have and continue to assemble a group of investors that will accept deal flow (most of these are the people that told US no, but we maintained a relationship with) and have the entrepreneurs present their first pitch using a virtual forum. We got tired of paying to travel the country, paying to apply, paying to present, paying to feed and paying to sit in the room so we came up with an alternative. The only problem as you outline is we are making people pay, because that’s the way we had to do it. Because of some (not all) negative feedback about the presentation fee and due in large part to your article we have done away with a presentation fee but have left a application fee of $150 in place. I would be interested on your thoughts regarding the application fee. In closing, I though it odd that the VC you mentioned had never heard of the idea of “Pay to Pitch” because almost (not all) but almost every group we encountered we had to pay to play. This includes some of the largets VC’s and deal makers in the country. Thanks for your helpful articles and you have a new reader.

Leave a Comment

Your email address will not be published. Required fields are marked *